‘Rublecoin’ under surveillance. Russia to churn its own Bitcoin
Governments of many countries are scratching heads over the upcoming revamping of their financial systems due to such challenges as blockchain systems and cryptocurrencies. Russia is facing these issues as well. Based on the measures taken by our country so far, it is going to follow its own way once again by isolating itself from the external world and imposing total control inside.
Early in the month, the Russian media have caused a stir among the public (to be specific, among the most technically and financially advanced part of the public) by reporting arrests of people suspected of Bitcoin cashing. According to the statement issued by the Ministry of Internal Affairs (MIA) of the Russian Federation, three persons detained in the Kostroma region had cashed over 500 million rubles ($8.7 million) “using Bitcoin exchange platforms”. The suspects have been charged under part 2 of Article 172 of the Criminal Code of the Russian Federation (Illegal Banking Activity). The indictment has already been submitted to the court.
Later experts explained that the arrest of the criminals (that had occurred, by the way, back in 2015) was likely related to activities of their so-called ‘exchange’ that had operated without a banking license. In other words, this is not about Bitcoins – it is legal to buy, transfer, and spend them – but similarly with fiat currencies, it is prohibited to cash them out illegally.
It is necessary to keep in mind though that cryptocurrencies, including Bitcoin, have no legal status in Russia – therefore they are not considered money. Hence the actions of the Kostroma entrepreneurs can rather be qualified as money laundering or illegal enterprise. In other words, the situation has been clarified but yet left a bad taste...
Money of the future?
The skyrocketing popularity of cryptocurrencies, including Bitcoin, pertains to the trust, safety, convenience, and cheapness. We still use cash and in order to transfer money to a friend in another part of the world, we have to deal with banks acting as intermediaries – while the banks may charge commission and then spend several weeks to complete the transaction. The cash (and scriptural money) can be stolen from us on the way to the bank, the bank may collapse, while the national currency may devaluate. Such detrimental scenarios may occur any time – this is completely beyond our control.
Video: Gref: Blockchain would eliminate the need in banks
The above risks fuel the interest to an ‘alternative’ monetary system based on completely different principles. Bitcoin has no single governing center – i.e. no one can block, seize, or freeze somebody else’s account. Transactions between clients, including money transfers, are instant and cost ‘pennies’. To date, no one was able to forge or steal a Bitcoin.
Blockchain is a decentralized information storage and transfer system based on a continuous chain of records called blocks. Its main advantage is that each block contains information from the previous one. All the blocks contain information about all the operations performed by the system. This eliminates the possibility to forge or destroy data contained in the system.
Cryptocurrency is a digital analogue of a financial system based on the blockchain technology; the watchdog functions are distributed among all the system users.
Created in 2009, Bitcoin is the most popular cryptocurrency in the world. Information about deals with Bitcoins is open, but Bitcoin holders remain anonymous – as well as sums stored on their accounts.
The system has been launched by a programmer (or group of programmers) hidden under the name of Satoshi Nakamoto; now it is functioning independently thanks to its users who can participate in the Bitcoin mining, thus, making money.
The Bitcoin–USD exchange rate
The Bitcoin emission is limited – currently, some 17 millions units are circulating and their churning is ongoing. However, according to the initial algorithm of this cryptocurrency, its emission is about to end by 2140 after the production of 21 million Bitcoins. The creation of each next Bitcoin is more and more labor consuming. Combined with other unique features, this is the main reason behind its amazing exchange rate growth. But the main factor is the people’s trust in a new payment system able to replace the traditional one in the observable future.
On the other hand, opponents of the cryptocurrency compare it with a financial pyramid and identify features of a financial bubble that is about to burst sooner or later.
Mining is a way to earn Bitcoins (and many other cryptocurrencies) by maintaining the system and creating new units. To be efficient, the process requires pretty powerful computers and considerable power costs.
A considerable time should pass before the cryptocurrency spreads all over the worlds, finds its way to all the social strata, and becomes commonly accepted. So far, the vast majority of people in the world are not ready to rely on the computer completely and exchange real money for virtual ones.
The most terrible currency in the world
Of course, a system that does not need banks, governmental regulation, and other exterior intermediaries and replaces the money printed by the governments can not be welcomed by these governments – this applies not only to the Russian authorities.
Currently Bitcoin is a legal means of payment only in Japan. In Germany, it is a monetary unit of account – i.e. it does not have a physical embodiment. In Switzerland, it is equaled with a foreign currency. In Norway, Bitcoin has been recognized an exchange asset but not a currency. In Croatia, the cryptocurrency can be legally sold – although it is not a lawful currency (i.e. vendors don’t have to accept it on equal terms with the local money). Overall, the exchange of Bitcoins for fiat currencies is tax exempt in the European Union.
The Chinese authorities have prohibited the banks from making transactions with Bitcoins but permitted this to individuals. Bitcoins are considered a commodity, not monetary funds.
The U.S. authorities consider Bitcoin a ‘virtual currency’ – similarly with private digital money used in social networks, virtual worlds, and online games.
Other governments haven’t formulated yet their stance towards the cryptocurrency in general and Bitcoin in particular. However, every easing of regulations with respect to Bitcoin immediately raises its value.
Countering terrorism and color revolutions
The acquisition and storage of Bitcoins is currently not officially prohibited in Russia. The authorities, however, are naturally inclined to ban everything unknown and concurrently demonize it. Therefore, in January 2014, the Bank of Russia has issued a press release warning the citizens and legal entities against the use of ‘virtual currencies’ and exchanging those for goods (works, services) or monetary funds in rubles and foreign currencies and reminding that the emission of ‘quasi-money’ is prohibited in Russia. The regulatory authority has added that the exchange of Bitcoins, sale of goods, and provision of services for Bitcoins would be treated as potential money laundering or terrorism financing.
A month later, the Prosecutor General’s Office has also named the cryptocurrency ‘quasi-money’ and stated that the growing interest to it is linked inter alia with the intention to launder proceeds of crime.
The Federal Drug Control Service of the Russian Federation has soon added that virtual currency Bitcoin is increasingly frequently used by narcomafia as a payment instrument in drug sales.
In August 2014, Evgeny Volovik, Head of the Information and Communication Department of the International Training and Methodology Center for Financial Monitoring (ITMCFM), said that one or several cases pertaining to the money laundering through Bitcoins are under investigation in Russia. He hasn’t provided any details though.
Concurrently, the Ministry of Finance has drafted a bill expanding the interpretation of the term ‘quasi-money’ and imposing new sanctions for its production/emission, distribution, and information about it. According to the bill, its authors had planned to punish for information about the production of cryptocurrencies, their functioning, and usage for various deals. However, the Ministry of Economic Development has defeated the bill proposed by the Ministry of Finance for its “too general definition of ‘quasi-money’” applicable to marketing programs of many companies, including communication service providers, major retail chains, and even Sberbank.
In 2015, in accordance with a court decision, the Federal Service for Supervision of Communications, Information Technology, and Mass Media (Roskomnadzor) started blocking Bitcoin exchange and cashing web sites. The court verdict was based on an article of the Federal Law On the Central Bank of the Russian Federation (Bank of Russia) prohibiting the introduction and production of ‘quasi-money’ in Russia. Even web sites writing about Bitcoins have been affected. For example “Zuckerberg Will Call” portal has been shut down by an Astrakhan court for an article entitled “What are Bitcoins and Who Needs Them” dated April 11, 2013. The court had recognized the article tax crime propaganda. However, later some of these decisions were annulled following appeals.
In early 2016, Alexander Bastyrkin, Chairman of the Investigative Committee of the Russian Federation (ICR), has announced the possible criminalization of Bitcoins, while the Ministry of Finance proposed to punish individuals for production of ‘quasi-money’, including Bitcoins, by deprivation of liberty for a term of up to four years. The same ‘crime’ committed by an organized group was supposed by be punishable by deprivation of liberty for a term of up to six years, while top managers of banks and financial companies had to be jailed for up to seven years for such deeds. The situation was pretty similar to draconian currency regulations in the U.S.S.R. – except for execution by fire squad for currency-related crimes.
As usually, this struggle was accompanied by media hype.
“Cryptocurrencies pose a threat to the financial stability and financial sovereignty of Russia,” – Andrei Krutov, Deputy of the State Duma representing Edinaya Rossia (the United Russia) Party, had stated.
“All these cryptocurrencies have been created by American secret services to finance terrorism and color revolutions,” – echoed Andrei Svintsov, Deputy of the State Duma representing the Liberal-Democratic Party of Russia.
This home located in Nikolino township of the Moscow region is offered for sale for 3 thousand Bitcoins
However, in 2016, Aleksei Averchuk, the Deputy Head of the Federal Tax Service, has published on behalf of his agency a letter concluding that the Russian legislation does not directly prohibit Russian citizens from making transactions with cryptocurrencies. Therefore, the Federal Tax Service considers cryptocurrency purchases and sales currency exchange transactions. Furthermore, the domestic legislation does not define such terms as ‘quasi-money’, ‘cryptocurrency’, or ‘virtual currency’.
In April 2017, Vadim Kalukhov, the Head of the Financial Technologies Department of the Central Bank of Russia, told at the forum “Blockchain: Dialog between Business and Authorities” that the Bank of Russia had never called for a ban on cryptocurrencies but rather issued a warning that these may pose risks.
Other participants of the market think otherwise. Pavel Durov, founder of VKontakte and Telegram, said that he does not understand the intention of the Russian authorities to restrict the acquisition of Bitcoins. Durov believes that the world financial system has got the first chance in 70 years to liberate itself from the American hegemony. The U.S. has forced the world to accept its national currency as the reserve one – but instead of “using this opportunity”, the Russian authorities call for bans and restrictions.
German Gref, the Sberbank CEO and Chairman of the Board, believes that the cryptocurrencies must be regulated – but in a soft manner to avoid “hugging to death” a very perspective technology. According to Gref, the blockchain mechanism forming the basis of all the cryptocurrencies, including Bitcoin, is based on a different economic principle. The Head of Sberbank considers bans and prohibitions not applicable in that situation.
First Deputy Prime Minister Igor Shuvalov shares the position of Gref; he said that the governmental structures can not ignore the emergence of cryptocurrencies, while the blockchain technologies may become the basis for quick and professional provision of state services.
Putin got hooked
President Vladimir Putin has mentioned cryptocurrencies for the first time in summer 2015. He said at Terra Scientia Russian Educational Youth Forum that he does not rule out that these ‘coins’ may be used as a form of payment in some spheres. However, Dmitry Peskov, Press Secretary for the President of Russia, was quick to correct this statement by saying that it can’t be interpreted in support of Bitcoins as a payment method in Russia. As usually: possible in theory but impossible in reality.
Nevertheless, the national leadership began understanding that the technical progress can’t be stopped, while the blockchain technology – compared by some IT specialists with the creation of Internet – is a truly revolutionary achievement. In June 2017, First Deputy Prime Minister Igor Shuvalov said at the St. Petersburg International Economic Forum (SPIEF) that the President “got hooked on the digital economy”. Putin even had a meeting with Vitalik Buterin, creator of one of the main competitors to Bitcoin – Ethereum (Ether). The 23-year-old Canadian of the Russian descent has won the World Technology Award in 2014 beating Mark Zuckerberg and other authoritative contenders.
Buterin foresees much more applications for his system in addition to the cryptocurrency maintenance. According to him, in the future, Ethereum may replace all the spheres involving data storage, verification, transfer, etc. This includes inter alia monetary operations – financial contracts, insurance, crowdfunding, and all kinds of investments. For instance, in order to register title in a property, it is necessary to fill out required forms and submit these to the respective authority. But who can guarantee that a malefactor having access to the information does not register your home or apartment in somebody else’s name? The blockchain technology eliminates such risks. The system is distributed among a large number of computers and all its users would immediately see the changes that are tracked. Therefore, the public trust in blockchain-based services would only grow over time.
Contrary to earlier loud declarations about ‘quasi-money’ and ‘financing of terrorism’, Aleksei Moiseev, Deputy Minister of Finance, has made the first step towards the legalization of cryptocurrencies. In late August 2017, he said the Ministry supports the legalization of Bitcoin trade by qualified investors at the Moscow Exchange. The functionary has noted, however, that the Ministry is against the admission of individuals and private investors to cryptocurrency trades at the exchange. This means that cryptocurrencies are to be equaled to securities and used only as savings instruments, thus, losing all their other unique features.
The bill legalizing cryptocurrencies in Russia is expected to be produced by 2018. The Bank of Russia, Federal Financial Monitoring Service (Rosfinmonitoring), and Ministry of Finance are currently working on it. The State Duma is also involved into this process – a special interdepartmental working group for assessment of risks from the cryptocurrency circulation has been established. Deputy Andrei Lugovoy, a member of this group, says though that it is premature yet to consider the bill ready for debates.
The authorities capitalize on the current uncertain situation and attempt to make money on those involved into the cryptocurrency technologies. Nikolai Nikiforov, Minister of Telecom and Mass Communications, has recently proposed to impose personal income tax upon cryptocurrency transactions – this provision is included into the draft cryptocurrency circulation regulations developed by his Ministry. Nikiforov has also noted that Bitcoin likely won’t be completely legalized in Russia because it is based on foreign encryption algorithms.
The Ministry of Natural Resources and Environment suggests to use only renewable power sources for cryptocurrency production. Minister Sergei Donskoi said that this would reduce the negative impacts of the Bitcoin mining on the environment. He has emphasized that there are plenty of excessive hydro-electric generating capacities in Siberia and the Russian Far East that could be used to create cryptocurrencies.
The Ethereum–USD exchange rate
The Ministry of Finance proposes to license cryptocurrency traders claiming that some Russian citizens make “fantastic profits” on cryptocurrency transactions and the government is entitled to a portion of these revenues.
It is still hard to imagine that a monetary system operating beyond the control of national central banks could be legalized in a country consistently restricting the Internet in the recent years. Perhaps, its usage would be legally limited at initial stages with further creation of a controlled non-anonymous faux-cryptocurrency. Instead of foreign cryptocurrencies that are allegedly used for illegal operations, we are going to get a domestic sovereign ‘Rublecoin’ emitted by the state. In other words, Russians willing, similarly with people living in advanced countries, to use a cryptocurrency would get instead a payment instrument on the terms set by the government. These terms won’t differ much from the current conditions, and the only remaining advantage would be the transfer speed. For many users, this might be sufficient, but the main idea of Bitcoin – decentralization and independence from external control – is to be eliminated. Needless to mention the mandatory identification for all cryptocurrency owners and tracking of all their transactions.
Olga Skorobogatova, the First Deputy Governor of the Bank of Russia, said that the primary regulatory authority has already started developing a virtual national currency. Pavel Livadny, the State Secretary and Deputy Director of Rosfinmonitoring, said that in the development of this payment instrument, his agency is focused on the elimination of users’ anonymity. According to him, taking how harmful the cryptocurrency may be for national economies and stability of financial systems, it definitely must be regulated.
Obviously, such a cryptocurrency would be country-specific – it is unlikely that foreign investors would be willing to buy into it. In fact, this is just about a new way to make ruble transactions. However, our fellow countrymen have understood long time ago that it is better to keep savings not in rubles, but in American dollars – even virtual ones – that are currently the world reserve currency and that may be superseded by cryptocurrencies in the future.
In addition, the blockchain technology has another feature that likely won’t allow it to become fully accepted in our country.
In one of his interviews, Buterin said that blockchain may increase the efficiency and transparency of the national financial system: “When budget funds are distributed and assigned to specific projects (e.g. construction of a bridge), the digital money can be marked. Should the funds be used improperly, it is easy to track their path to the final beneficiary”. But how to embezzle funds or receive bribes and ‘kickbacks’ in that situation?..
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